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Simon Watkins

Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…

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Iran Examines Options To Widen Israel-Hamas War After Strike on its Consulate

  • Tehran’s key objective has been to widen that war into one involving multiple Arab states on the one side, and on the other side Israel.
  • The missile strike on Iran's consulate in Damascus has significantly raised risks of escalation.
  • Iran could opt for various types of retaliatory strikes, including oil-related actions.
Iran defense forces

From the first moment several months ago when the 7 October attacks by Hamas on numerous civilian targets in Israeli territory were planned by the terrorist organisation and its Iranian backers, Tehran’s key objective has been to widen that war into one involving multiple Arab states on the one side (tacitly backed by China and Russia), and on the other side Israel (and its key Western sponsors, especially the U.S). “We’ve known all along, as has Washington, that this was the plan which is why we’ve done everything to mitigate the risks of that happening,” a very senior European Union (E.U.) energy security source exclusively told OilPrice.com last week. “But the missile strike [on 1 April] on the Iranian consulate in Syria has raised the risks of escalation significantly again,” he added.

Israel has declined to comment on the attack, which killed several key figures from Iran’s Islamic Revolutionary Guard Corps (IGRC), including Brigadier General Mohammad Zahedi – a senior commander in the IRGC’s affiliated Quds Force – and his deputy, General Mohammad Hajriahimi, among others. However, Iran’s Foreign Minister Hossein Amirabdollahian described the attack “as a violation of all international obligations and conventions” and directly blamed Israel. This appears to be a view shared by several other Islamic countries in the region, including Saudi Arabia, Iraq, Jordan, Oman, Pakistan, Qatar, and the United Arab Emirates (UAE). The UAE later broke off diplomatic coordination with Israel in response to the 4 April killing of seven aid workers by Israeli forces in Gaza. Iran’s Foreign Ministry spokesman Nasser Kanani later said that Iran “reserves the right to carry out a reaction and will decide on the type of response and the punishment of the aggressor”. The key question for the oil markets, then, is how might Iran retaliate? Related: Gas Glut? Not for Long.

Broadly speaking, there are two type of retaliation Iran might make. The first would be directly oil-related with additional geopolitical uncertainty attached, and the second would be military with the same geopolitical risks connected. On the first of these, Iran has already revealed what it has in mind, with its earlier call on the Islamic countries of OPEC to embargo oil exports Israel, as analysed by OilPrice.com. According to a very senior oil industry source who works closely with Iran’s Petroleum Ministry and spoken to exclusively by OilPrice.com last week, Iran’s true intention was always to broaden this embargo out to all countries who are supporting Israel in the war against Hamas. This mirrors exactly what Saudi Arabia called for – and achieved - in 1973/74 to countries that supported Israel during the Yom Kippur War with Egypt and Syria, as analysed in full in my new book on the new global oil market order. As global oil supplies fell, the price increased dramatically, exacerbated by incremental cuts to oil production by OPEC members over the period. Gas prices also rose, as historically around 70 percent of them are comprised of the price of oil. By the end of the embargo in March 1974, the price of oil had risen around 267 percent, from about US$3 per barrel (pb) to nearly US$11 pb. This, in turn, stoked the fire of a global economic slowdown, especially felt in the net oil importing countries of the West.

So, what would a broader oil embargo look like now? According to the World Bank, even a loss in global crude oil supply of 6-8 million barrels per day (bpd) – which it refers to as a “large disruption” scenario comparable to the 1973 Oil Crisis - would result in a 56-75 percent increase in prices to between $140 and $157 per barrel. However, a broadening out of the embargo on Israel by the Islamic members of OPEC, would likely lead to a much bigger loss of global oil supplies than the World Bank has calculated. The Islamic members of OPEC are Algeria, with an average crude oil production rate of around 1 million barrels (bpd), Iran (3.4 million bpd), Iraq (4.1 million bpd), Kuwait (2.5 million bpd), Libya (1.2 million bpd), Saudi Arabia (9 million bpd), and the UAE (2.9 million bpd). This totals just over 24 million bpd - or about 30 percent - of the current average total global production of about 80 million bpd. Alongside such an embargo, Iran would certainly call upon its Houthi proxy forces to step up the already severe level of attacks on oil shipping in and around the Red Sea region to push oil prices even higher.

The Houthis could also be used in another oil-related scenario, which has also already been mooted, which is to launch attacks on Saudi Arabia’s key oil installations. As also analysed by OilPrice.com, the Houthis very recently vowed to attack Saudi Arabia if it continues to allow U.S. warplanes to use its territory for military strikes against the Yemeni rebel group. The last time the Houthis launched major coordinated attacks against the Saudi Arabian mainland - on 14 September 2019 against the Abqaiq oil processing facility and Khurais oil field - Saudi Arabia’s oil production was halved, causing the biggest intra-day jump in U.S. dollar terms since 1988, as also analysed in full in my new book on the new global oil market order. Such attacks would again be sure to draw the U.S. into an even greater involvement in the region, given that it already has created ‘Operation Prosperity Guardian’ to guard against future Houthi attacks on oil shipping in the Red Sea region. This came shortly after the U.S. Department of Defense stated that the initiative was being launched under the umbrella of the Combined Maritime Forces and the leadership of its Task Force 153. The danger of escalation for the U.S. with Iran’s key ally – including in Syria – Russia, is also evident to Tehran, as Moscow recently deployed its own fleet of warships around the Bab el-Mandeb Strait and Red Sea.

On the other type of retaliation Iran might make - military with additional geopolitical uncertainty attached – the options are also many. According to the E.U. energy security source, U.S. intelligence agencies have picked up indications that Iran may be planning attacks on Israeli targets using drones and cruise missiles. To avoid direct unequivocal linkage with such attacks, it is highly possible says the source that they are launched by Iranian proxy forces from another country – Yemen and/or Syria and/or Iraq would be the most obvious places. These threats are being taken sufficiently seriously by Israel that on 4 April it suspended leave for combat units and heightened its air defence command to deal with possible missile or drone attack. It is also considering reopening bomb shelters in Tel Aviv as a precaution against such attacks.

Another previously threatened military escalation might also be put into action, which is the full activation of Hezbollah in Lebanon, to Israel’s direct north, comprising a 100,000-strong very well-equipped fighting force funded and trained by Iran’s IRGC that dwarfs the fighting capabilities of Hamas in all respects. On 16 October last year, Iran’s Foreign Minister Amirabdollahian warned that its regional network of militias would open “multiple fronts” against Israel if its attacks continued to kill civilians in Gaza. In response, 21 October saw Israel’s Economic Minister, Nir Barkat, said that if Hezbollah fully joins the war then Israel would “cut off the head of the snake” and launch a military attack against Iran. A third front could also be opened by Iran, using its own IRGC and proxy militant forces stationed in Syria, to Israel’s northeast. In a broad statement of intent to deal with any such threats, Israeli Prime Minister Benjamin Netanyahu said last week that, “For years, Iran has been acting against us both directly and via its proxies; therefore, Israel is acting against Iran and its proxies, defensively and offensively.” 

By Simon Watkins for Oilprice.com

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Leave a comment
  • Mamdouh Salameh on April 08 2024 said:
    Iran has no alternative but to retaliate against the killing of some of its top Islamic Revolutionary Guard Corps (IRGC) officers in an Israeli attack on its Consulate in Damascus otherwise it will be seen as a paper tiger.

    From the start of the war between Hamas and Israel, Iran sought to avoid getting involved in it because it didn't want to widen the war and in so doing giving the United States and Israel the pretext they are seeking to attack and destroy Iranian nuclear installations. Moreover, by involving Hezbollah Israel will get its chance to destroy again the infrastructure of Lebanon as it did in 2006.

    One very risky option for Iran is to go for broke by sending thousands of missiles raining on Israel simultaneously with Hezbollah hammering it from the South of Lebanon, IRGC from Syria and the Houthis from Yemen. This will achieve many objectives: inflicting maximum damage on Israel and causing an exodus of jews from Israel and also accelerating the ejection of the US military presence from the Middle East. But this could force Israel to retaliate with nuclear attack on Iran.

    Another option is for Iran to play it safe and go after Israeli embassies around the world in a tit for tat retaliation. Such a response could be relatively more tolerated than bombing Israel.

    However, whatever retaliation Iran decides on risks plunging the world in a disastrous energy crisis particularly if it manages to mine and block the Strait of Hormuz through which some 20 million barrels of oil pass daily and large volumes of Qatari LNG. A disruption of oil shipments could cause Brent crude to hit $110-$120 a barrel but it won't last long because the US Navy and navies of its allies will unblock the Strait quite quickly.

    An oil embargo against Israel won't work either because Israel only consumes an estimated 250,000 barrels a day (b/d) which could be sourced from Norway and the United States.

    Dr Mamdouh G Salameh
    International Oil Economist
    Global Energy Expert


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